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* Follows EU solar panel dumping duties
* Chinese will investigate alleged EU subsidies to wine
* China's wine industry says EU wines are sold below cost (Updates throughout with EU reaction)
BEIJING, July 1 (Reuters) - China formally began an investigation on Monday into whether Europe is selling wine in China below cost, a response to escalating trade tensions with the European Union.
The Chinese government said it would seek to determine if EU producers benefited from unfair subsidies following a complaint from its own wine producers.
EU officials have said China is only targeting the EU wine industry in retaliation for a dispute with the European Union over cheap Chinese solar panels.
A European Commission spokesman said he was disappointed to learn of China's latest action and that the Commission, the EU executive, would examine whether it was consistent with World Trade Organization (WTO) rules.
WTO rules prevent members from levelling tit-for-tat sanctions, instead requiring proof assembled via thorough investigation that a country's industry has suffered damage before any duties can be imposed.
In its announcement on Monday, China's Commerce Ministry said its inquiry, expected to last at least a year, would meet the relevant WTO rules.
"The Ministry of Commerce will follow the principles of openness, fairness and transparency, fully respect all parties' legal rights, and make a fair ruling based on objective fact and the relevant laws and regulations," it said.
The European Union accuses Chinese manufacturers of dumping billions of euros' worth of solar panels in Europe at below-production cost.
It levied punitive tariffs on Chinese solar panels in June and has warned the duties will rise further unless a negotiated solution is reached by early August.
EU Trade Commissioner Karel De Gucht, in China last month for talks, said he hoped any agreement on solar panels would help to resolve the wine dispute. EU officials deny the dumping of wine in China or subsidising exports.
The European Union is China's most important trading partner, while for the European Union, China is second only to the United States.
Chinese exports of goods to the bloc totalled 290 billion euros ($377 billion) last year, with 144 billion euros going the other way.
Wine sales are only a small fraction of overall EU exports, but China's rapidly expanding middle classes have a growing thirst for European wines, especially those from France.
China has become the biggest importer of Bordeaux wines, whose consumption rose by 110 percent in 2011 alone. ($1 = 0.7693 euros) (Reporting by Li Hui, Koh Gui Qing, and Michael Martina in Beijing, and Ethan Bilby in Brussels; Editing by Raissa Kasolowsky)